SCHRODERS CAPITAL Global Real Estate Lens - January 2023
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January 2023
SCHRODERS CAPITAL
Global Real Estate Lens
Marketing material for professional clients only.
01 3 02 7 03 8
Economic Environment Occupier Market Private Equity Capital
Conditions Markets
CONTENTS
04 12 05 13 06 14
Debt Capital Markets House Thought Piece Business Update
2
Growth and inflation forecasts
Excluding the pandemic, the global economy is set for its weakest year since the GFC
Contributions to world GDP growth (y/y)
8 5.7 6.0
5.2
6 3.9
3.1 3.1 3.4 3.4 3.1 3.6 3.5
4 2.8 2.2
2.8 2.7
1.3
2
0
-2
-4
-0.1
-3.1
SECTION 1
-6
07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
US Europe
Contributions to world inflation (y/y)
Rest of advanced China Rest of emerging World
ECONOMIC
9 7.6 ENVIRONMENT
7
4.8
3.9 4.9 3.9
5 3.3
2.7 2.8 2.4 2.2 2.5 2.5 3.4
2.1 1.6 1.8
3 1.1 1.5
1
-1
07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
US Europe Rest of advanced China Rest of emerging World
The forecasts included are not guaranteed; they are provided only as at the date of issue and should not be relied upon. Our forecasts are based on
our own assumptions which may change. We accept no responsibility for any errors of fact or opinion and assume no obligation to provide you
with any changes to our assumptions or forecasts. Forecasts and assumptions may be affected by external economic or other factors.
Source: Refinitiv, Schroders Economics Group, November 2022.
3Central banks still have work to do
Energy and food prices turning disinflationary, but core inflation is firm
Headline CPI inflation Core CPI inflation
y/y% y/y%
14 14
12 12
10 10
8 8
6 6
4 4
2 2
0 0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2022 2023 2024 2022 2023 2024
Forecast US Eurozone Germany UK Forecast US Eurozone Germany UK
Source: Schroders Economics Group, 25 November 2022. Please see the forecast risk warning on the important information slide.
4Upside risk could come from lower energy prices
Europe could be a major beneficiary if supply from Russia can be switched
Brent Crude oil price and forward curve European gas prices
£ price per barrel £ per term
130 130 10
9
120 120
8
7
110 110
6
100 100 5
4
90 90
3
2
80 80
1
70 70 0
Jan 22 Apr 22 Jul 22 Oct 22 Jan 23 Apr 23 Jul 23 Oct 23 Aug 22 Sep 22 Oct 22 Nov 22 Dec 22 Jan 23
Dec-22 Dec-23 Dec-24
Source: Refinitiv, Atlanta Fed, Schroders Economics Group. January 2023.
5Credit indicators suggest activity will turn higher
Which should be boosted further as zero-Covid restrictions end
30 22 25 20
20 18
20
25 18 16
16 15 14
20 14 12
10
12 10
15 10 5 8
8 6
0
10 6 4
4 -5 2
5 2 0
-10
0 -2
0 -2 -15 -4
2000 2003 2006 2009 2012 2015 2018 2021 2008 2010 2012 2014 2016 2018 2020 2022
Real M1 (% y/y Adv 10m, LHS) Credit Impulse (Using Trend GDP Adv 9m, LHS)
China GDP Estimate Based on Low-Level Data* (% y/y, RHS) China GDP Estimate Based on Low-Level Data* (% y/y, RHS)
Source: Refinitiv, Schroders Economics Group, December 2022. *Railway freight, seaport cargo, parcel volumes, vehicle production & sales, electricity production, railways & airline passengers, new housing starts,
cement production, excavator & truck sales, industrial metals import volumes
6Rental growth and vacancy rates
Rents remain under pressure in the retail Tight vacancy remains, particularly in the
sector whereas prime CBD office industrial/logistics sector, where solid
locations have generally seen flat to occupier demand remains across all
positive growth. major markets.
Q3 22 office rental growth Q3 22 office vacancy rates
(y/y based on local currency)
15% 30%
25%
10%
20%
5%
0%
15%
10% SECTION 2
5%
-5% 0%
Munich
Shanghai
Chicago
Madrid
Los Angeles
Paris
Frankfurt
Milan
Beijing
London
Tokyo
Boston
New York
Berlin
Sydney CBD
San Francisco
Seattle
Stockholm
Singapore
Hong Kong
Munich
Shanghai
Chicago
Amsterdam
Madrid
Los Angeles
Paris
Frankfurt
Milan
Beijing
Boston
Manhattan
London
Sydney
Tokyo
Berlin
San Francisco
Stockholm
Singapore
Hong Kong
Amsterdam
OCCUPIER MARKET
Q3 22 retail rental growth¹
(y/y based on local currency)
Q3 22 industrial/logistics vacancy rates CONDITIONS
6% 14%
4% 12%
2% 10%
0%
8%
-2%
-4% 6%
-6% 4%
-8% 2%
-10% 0%
Munich
Madrid
Shanghai
Paris
Frankfurt
Beijing
London
Milan
Tokyo
Berlin
Sydney
Stockholm
Hong Kong
Singapore
Amsterdam
Germany
Shanghai
Chicago
Los Angeles
Italy
UK
France
Beijing
Tokyo
Netherlands
Spain
Boston
Seattle
Sydney
Hong Kong
Singapore
San Francisco
Source: CBRE, JLL, Schroders Capital Real Estate, November 2022. ¹Retail rental growth data reflect high street, shopping centre or strip centre
where relevant.
7Transaction volumes (US$bn)
Global transaction volumes fell an annual Lead data for the US showed that
30% during the third quarter as rate rises activity fell an annualised 62% during
and growth concerns weighed on all the Q4 22. Surprisingly retail property
markets. transaction volumes grew 4% in 2022
Global EMEA
$1,500 $500
$400
$1,000
SECTION 3
$300
$200
$500
$100
$- $-
2008
2007
2009
2020
2021
Q3 2022
2018
2010
2012
2014
2015
2019
2013
2016
2011
2017
2009
2007
2008
2020
2021
Q3 2022
2014
2010
2011
2012
2013
2015
2016
2017
2019
2018
Office Industrial Retail Apartment Hotel Office Industrial Retail Apartment Hotel
PRIVATE EQUITY
Asia Pacific Americas
CAPITAL MARKETS
$250 $800
$700
$200
$600
$150 $500
$400
$100 $300
$50 $200
$100
$- $-
2008
2009
2007
2020
2021
Q3 2022
2012
2015
2018
2010
2013
2014
2016
2019
2011
2017
2008
2009
2007
2020
2021
Q3 2022
2012
2015
2018
2010
2013
2014
2016
2019
2011
2017
Office Industrial Retail Apartment Hotel Office Industrial Retail Apartment Hotel
Source: RCA, January 2023
8Commercial real estate pricing
Commercial real estate price growth has now firmly turned negative in light of negative market conditions according to Green Street.
Data for Europe showed steep annual declines for the “core” sectors of 13% during 2022 and an equivalent 16% fall in the US. There
has been noticeable variation across the major sectors with retail less exposed in the recent quarters given the negative performance
already experienced in prior years.
European & US commercial property price indices¹ ² – Q4 19 = 100 European core sectors property price index YoY to end December 20221
130 0% 0%
Europe US
125
-5%
-10%
120
-15% -13%
-15%
115 -16%
-20%
110 -21%
-25%
Office Retail Industrial Multifamily Average
105
100
US core sectors property price index – YoY to end December 20221
0%
95
-5%
90
-10%
-9%
85
-15%
-14%
80 -15%
-16%
-20%
1Q20
3Q20
3Q21
1Q21
1Q22
3Q22
4Q19
2Q20
2Q21
2Q22
4Q20
4Q21
4Q22
-19%
Office Retail Industrial Multifamily Average
Source: Green Street Advisors, Schroders Capital Real Estate, January 2023. Core sectors is an unweighted average of the office, industrial, multifamily and retail sectors.
9Global private real estate fund performance
Global core real estate funds’ quarterly total returns turned Global non-core performance slowed noticeably to 1.0% in the
negative over Q3 22 registering -0.4%. Quarterly performance third quarter. Regional performance differed to regional core
in the US and Asia slowed materially yet remained positive at performance with Europe and the US materially slowing yet
0.3% and 0.8% respectively whilst it runed sharply negative in remaining positive at 0.2% and 1.7% respectively whilst
Europe at -1.7%. conversely Asia Pacific funds showed a -3.4% total return.
Core private real estate fund returns in local currency Non-core private real estate fund returns in local currency
30% 30%
25% 25%
20% 20%
15% 15%
10% 10%
5% 5%
0% 0%
-5% -5%
Global Asia Pacific Europe US (ODCE) Global Asia Pacific Europe US
Q3 2022 1 year 3 year 5 year 10 year Q3 2022 1 year 3 year 5 year 10 year
Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts
originally invested.
Source: GREFI, Q3 2022. ANREV, INREV, NCREIF, January 2023.
10Private equity real estate fundraising
Global private real estate fundraising remains challenged, easing further during the fourth quarter of 2022 to finish the year
approximately 20% below 2021 levels at $169.1bn¹ raised versus $211.1bn. Dry powder levels have ticked up in January 2023 to
$382.6bn on account of modest fundraising post year-end 2022 of four billion USD.
Aggregate capital raised by strategy (US$bn) Aggregate capital raised by geography* (US$bn)
Number of funds
Number of funds
250 700
250 700
600 600
200 200
500 500
150 400 150 400
100 300 100 300
200 200
50 50
100 100
0 0 0 0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Jan-23 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Jan-23
Core Core Plus Debt Distressed North America Europe Asia & Australasia
Opportunistic Value Add No. of Funds Africa, Americas & Middle East Diversified No. of Funds
Dry powder by real estate strategy (US$bn) Dry powder by geography* (US$bn)
450 450
400 400
350 350
300 300
250 250
200 200
150 150
100 100
50 50
0 0
Core Core Plus Debt Distressed Value Add Opportunistic North America Europe Asia & Australasia Africa, Americas & Middle East Diversified
Source: Preqin, December 2022. *Refers to core, core-plus, debt, distressed, opportunistic and value add strategies. ¹ Amount raised as of 20 December 2022.
11Commercial real estate debt markets
US commercial real estate debt financing costs stayed largely flat over the month of
December. Debt capital markets also stabilised in Europe during the fourth quarter with
lending margins remaining largely steady with a small number of locations showing a
marginal reduction in the available loan-to-value (“LTV”) available
4Q22 US & prime Europe ‘G71’ senior commercial real estate mortgage debt finance costs by sector
US terms estimates are shown for a 10-year 50-59% LTV mortgage and for Europe a 55% LTV five-year term
6%
5%
SECTION 4
2.1% 2.1% 1.9% 1.8%
4% 2.2%
1.6% 1.6% 1.6% DEBT CAPITAL
3%
MARKETS
2%
3.5% 3.5% 3.5% 3.5%
2.8% 2.8% 2.8% 2.8%
1%
0%
US Office US Retail US Industrial US Europe 'G7' Europe 'G7' Europe 'G7' Europe 'G7'
Multifamily Office Retail Industrial Multifamily
10-Year Treasury Yield EUR 5-Year Swap Rate Margin
Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go
down as well as up and investors may not get back the amounts originally invested.
Sources: CBRE, Koyfin, Trepp, January 2023.. ¹ Includes Paris, Frankfurt, Milan and London.
12House thought piece: Investor intentions
Marked divergence in investors’ attitudes towards real estate
Investor intentions towards real estate
• The latest ANREV/INREV/PREA survey shows a marked
% Balance of looking to increase vs reduce exposure to real estate
divergence in investors’ enthusiasm for real estate across the major 80
regions. 12-months ago the majority of investors were targeting
60
increased allocations whereas now the picture is mixed.
40
• While the majority of investors in Asia Pacific still wish to increase
20
their exposure, European investors on balance are looking to
0
slightly decrease allocations, whilst North American investors are
seeing a modest increase. -20
-40
• This reflects investors in Asia Pacific being meaningfully under- 2018 2019 2020 2021 2022 2023
weight to the asset class vs target allocations, whereas European
Asia Pacific European North America
and North American investors are broadly in line.
• We believe these variations reflect the impact of economic Real estate allocations
% of portfolio value, end 2022
prospects with Europe and the US forecast to fall into recessions
15
during 2023. Conversely, China is expected to see stronger 12.0 12.7
10.8 10.5
growth, as it abandons its zero-Covid policy.
10 8.3
• Another notable difference across the regions are investors’ 6.3
attitudes to climate change. Three quarters of European investors 5
regard it as a major consideration when undertaking due diligence.
By contrast, less than 10% of North American investors see it as a 0
major issue and Asian investors, at 40%, are divided on the topic. Asia Pacific European North American
Current Target
Source: ANRE, INREV & PREA Investor Intentions Survey. January 2023
13Schroders Capital Real Estate update
Appointment of Head of France & Head of Living
Strategies
Sale of Jubilee House in Stratford, East London
SECTION 6
In addition to the successful hotel and office acquisitions
Hideki Kurata brings over 25 years of industry experience mentioned in our prior update, our UK team sold this
and will lead the growth and development of our French student accommodation asset in December 2022 at
real estate business. His responsibilities will also entail pricing that was in line with the most recent valuation
identifying and sourcing new strategic capital and
opportunities in the Living sector. Hideki joins from
Greystar, where he was responsible for the development
and a 29% premium to the December 2021 valuation.
The sale followed execution of the business plan, BUSINESS UPDATE
securing planning permission for redevelopment of the
of the business in France since 2018 and previously held site as well as exchanging an agreement for lease with
Business roles at AXA, GE Capital and JP Morgan. the London Academy of Excellence.
New strategies available in 2023: Asian diversified value add strategy, European real estate debt strategies, a UK place-
based social impact strategy, a northern European logistics strategy and a global semi-liquid “best ideas” strategy. We
are developing a European diversified value add strategy to be offered to investors during the course of the year.
Strengthening team across the globe: In the past month we have welcomed new joiners across the platform including
Craig Morey as our new dedicated Climate Lead helping us to develop our understanding and response to climate
impact risk and opportunity across the business. The Schroders Capital Real Estate team now encompasses over 270
Platform dedicated staff located across our offices.
Assets shown for illustrative purposes only and is not a recommendation to buy or sell any financial instrument/securities or adopt any investment
strategy.
Source: Schroders, January 2023.
14Important information Marketing material for professional clients only Past Performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of investments to fall as well as rise. Any reference to sectors/countries/stocks/securities are for illustrative purposes only and not a recommendation to buy or sell any financial instrument/securities or adopt any investment strategy. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on any views or information in the material when taking individual investment and/or strategic decisions. Schroders has expressed its own views and opinions in this document and these may change. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. This document may contain “forward-looking” information, such as forecasts or projections. Please note that any such information is not a guarantee of any future performance and there is no assurance that any forecast or projection will be realised. This material has not been reviewed by any regulator. For readers/viewers in Argentina: Schroder Investment Management S.A., Ing. Enrique Butty 220, Piso 12, C1001AFB - Buenos Aires, Argentina. Registered/Company Number 15. Registered as Distributor of Investment Funds with the CNV (Comisión Nacional de Valores). Nota para los lectores en Argentina: Schroder Investment Management S.A., Ing. Enrique Butty 220, Piso 12, C1001AFB - Buenos Aires, Argentina. Inscripto en el Registro de Agentes de Colocación y Distribución de PIC de FCI de la Comisión Nacional de Valores con el número 15. For readers/viewers in Brazil: Schroder Investment Management Brasil Ltda., Rua Joaquim Floriano, 100 – cj. 142 Itaim Bibi, São Paulo, 04534-000 Brasil. Registered/Company Number 92.886.662/0001-29. Authorised as an asset manager by the Securities and Exchange Commission of Brazil/Comissão de Valores Mobiliários (“CVM”) according to the Declaratory Act number 6816. This document is intended for professional investors only as defined by the CVM rules which can be accessed from their website www.cvm.gov.br. For readers/viewers in Canada: Schroder Investment Management North America Inc., 7 Bryant Park, New York, NY 10018-3706. NRD Number 12130. Registered as a Portfolio Manager with the Ontario Securities Commission, Alberta Securities Commission, the British Columbia Securities Commission, the Manitoba Securities Commission, the Nova Scotia Securities Commission, the Saskatchewan Securities Commission and the (Quebec) Autorité des marchés financiers. 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